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Memorandum to File

To
Jim and Linda
From
Lyniqueka A. Johnson
Rechea Delancy
Aleisha Cooper
CC
Terrance Richards
Re
The tax consequences

3-62-Alimony and relative tax consequences


Brief Summary of Facts:
Jim and Linda are our tax clients. They were divorced two years ago, and the
divorce decree stated that Jim was to make monthly payments to Linda. The court
designated $300 per month as alimony and $200 per month as child support, or a total
of $6,000 per year. Jim has been unemployed for much of the year and paid Linda
$2,000 that he said was for child support. In addition, Jim transferred the title to a
three-year-old automobile with a $4,000 FMV and basis of $7,000 in exchange for her
promise not to pursue any claim she has against him for the unpaid child support and
alimony.
Issue:
Does Linda have to report any alimony and is Jim entitled to an alimony deduction?
Law and Analysis:
According to the tax law, it has rather specific rules that distinguish alimony,
child support, and property settlements. Under current law, in order to be treated as
alimony, payments must meet all of the following requirements:

Be made in cash (not property)


Be made pursuant to a divorce, separation, or a written agreement

between the spouses


Terminate at the death of the payee

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Not be designated as being other than alimony (e.g., child support)


Be made between people who are living in separate households.

According to Internal Revenue Service Department of the Treasury


(Washington DC) Section 71(a) of the Code provides that gross income includes
amounts received as alimony or separate maintenance payments. Section 71(b)(1)
defines the term alimony or separate maintenance payment as any payment in cash
if: (A) such payment is received by (or on behalf of) a spouse under a divorce or
separation instrument; (B) the divorce or separation instrument does not designate such
payment as a payment which is not includible in gross income under 71 and not
allowable as a deduction under 215; (C) in the case of an individual legally separated
from his spouse under a decree of divorce or of separate maintenance, the payee spouse
and the payor spouse are not members of the same household at the time such payment
is made; and (D) there is no liability to make any such payment for any period after the
death of the payee spouse and there is no liability to make any payment (in cash or
property) as a substitute for such payments after the death of the payee spouse. A
payment must meet all of the factors to qualify as alimony. Section 71(b)(2) of the
Code defines a divorce or separation instrument as (A) a decree of divorce or
separate maintenance or a written instrument incident to such decree, (B) a written
separation agreement, or (C) a decree requiring a spouse to make payments for the
support or maintenance of the other spouse.)

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

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4912

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Analysis:
Child support payments are not included in gross income. As cash payments
were designated as maintenance by Jim, this characterization is likely to be followed.
The transfer of the car is not taxable as income from alimony as alimony rules require
that such payments made in the form of cash. It is clear that Jim is not entitled to
deduct any of the payments. If Linda is committed to writing, Jim may receive an
exemption from dependency and child credit. The fact that he was unemployed most
of the year, however, can mean that it owes little or no tax, and that would not benefit
from additional deductions or credits.
Linda cannot report any alimony income neither can Jim claim an alimony
deduction. Jim specifically paid $2000 that was designated as being a payment other
than alimony but indeed child support. Whiles Jim has made an attempt to transfer the
title of his three year old car which has a FMV OF $4000 and a basis of $7000 in
exchange for promise, it cannot be recorded as alimony income for Linda neither
alimony deduction for Jim. In essence, Linda doesnt report any alimony income and
Jim does not report any alimony deduction.

Child Support and relative tax consequences


John and Lindas divorce decree declared that payments be made by John to
Linda on a monthly or annual basis. The payments were intended to be or actually used
for child support. In this case, John was ordered to pay $200 per month or $2400 in

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

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child support per year. John has been unable to pay due to him being unemployed and
has paid Linda only $2000 of the $2400 in child support. Child support payments are
not includible in the gross income of Linda, even though she is the parent receiving the
child support payments. Additionally, there is no tax deduction for Jim, even though he
has paid 83% of the child support payments.

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

Taxation1@gmail.com

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Memorandum to File
3-63- Brief Summary of Facts:
John and Mary are our clients who have two small children and are looking for
ways to help fund the childrens college education. They have heard that Series EE
To
John and Mary

bonds are a tax favored way of saving and have requested your opinion on the tax
consequences. They have asked your opinion regarding the relative advantages of

From
Lyniqueka A. Johnson
Rechea Delancy
Aleisha Cooper
CC
Terrance Richards
Re
The tax consequences
Series EE bond
investments

purchasing Series EE bonds in their names versus the childrens names. John and Mary
have indicated that they expect to have a high level of income in the future and that
their children may receive other income sources from future inheritances.
Issue:
Making recommendations about the taxation consequences of Series EE bond
investments for John and Mary
Law and Analysis:
According to tax laws, Taxpayers may purchase and eventually redeem Series
EE bonds tax- free if they utilize the takings to pay certain college expenses for
themselves, a partner, or dependents. To qualify for the exclusion:
The bonds must be purchased after 1989 by an individual who is age 24 or
older at the time of the purchase.

Taxation 1
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Fax 242-356-1010

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The bonds must be purchased by the owner and cannot be a gift to the

possessor.
The gross from the bond redemption must be utilized for tuition and fees, which
are first reduced by tax-free scholarships, veterans benefits, Hope and Lifetime
Learning credits, and other similar measures. Married couples living together
must file a joint return to obtain the exclusion.

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

Taxation1@gmail.com

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Recommendation Analysis:
The primary advantage of purchasing bonds from Series EE in the names of the
parents is that it may be able to exclude the income interests that finally receive. They
must fit the basic requirements that the funds will be used for educational purposes and
comply with the limitation of income. As the limitation is indexed to inflation and
their future incomes are unknown, parents cannot be decided if they are entitled to the
exception. If bonds are purchased in the names of the children and are under 24 years
of age, the interest may be subject to the "child" tax. However, if the annual interest is
less than $1,900 per child and children choose to report each year there will be fewer
taxes even if the children are under age 24 and no tax if the income is less than $950.
The fact that parents expect high-income means that the leverage of the bonds
along the names of the children may be more worthy. This is lawful if the annual
income is not less $1,800 per kid or children are more than 23 years previous.
The fact that children can take in other income in the future means that minors
can face significant future taxes if the bonds are purchased in their names. This is
particularly a problem if the children are under age 24 because they tax parents at all
income interest. If it is the case of the children probably would benefit from waiting to
report the interest when the bonds are redeemed.
Series EE bonds are definitely a great way to help John and Mary fund their
childrens education. Series EE Bonds is a tax-favored way of saving and are very
advantageous. The full amount of interest is excluded, however, only if the combined

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

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amount of principal and interest received during the year does not exceed the net
qualified educational expenses (tuition and fees reduced by exempt scholarships) , and
the taxpayers 2014 modified AGI is not over $76000.
However, because John and Mary intend on making more money in the future
they may want to consider putting the bonds in their childrens names because if their
modified AGI exceeds $76000 or $113950 if they file jointly. The exclusion is also
fully phased out if AGI exceeds $143, 950 which is not seemingly beneficial as it
defeats the purpose of the initial reason for acquiring the Series EE Bonds.

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

Taxation1@gmail.com

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Memorandum to File
4-61- Summary of Facts:
Able Corporation is a closely held company engaged in the manufacture and
retail sales of automotive parts. Able maintains a qualified pension plan for its
employees, but has not offered nontaxable fringe benefits. You are a tax consultant for
the company who has been asked to prepare suggestions for the adoption of an
To
Able Corporation
From
Aleshia Cooper
CC
Lyniqueka Johnson;
Rechea Delancy

employee fringe benefit plan.


Issue:
Prepare a recommendation for the adoption of an employee fringe benefit plan.
The recommendations should discuss the pros and cons of different types of nontaxable
fringe benefits.

Re
The tax adoption of
an employee fringe
benefit program

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

Taxation1@gmail.com

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Recommendation Analysis:
Fringe or employee benefits are compensations made to an employee beyond
regular wages or salaries. It is important to note that tax law encourages certain types
of fridge benefits by allowing the employer to deduct the cost of benefits and the
employee to exclude such benefits from gross income ultimately, lowering tax
liabilities for both parties. The adoption of fridge benefits may also boost employee
morale and make new jobs more appealing to potential employees. Below outlines both
pros and cons of the tax consequences on nontaxable fridge benefits that can be
adopted by your company:

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

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Employer-paid Insurance:
Employees currently pay their own premiums for medical and health insurance.
If Able Corporation provides a group insurance plan, the company will be able to
deduct the cost of premiums paid for life, health, accident, and disability insurance.
Employees may exclude benefits from medical health and group term life insurance
from gross income but benefits received from disability are normally taxable. However,
if Able Corporation discriminates against lower income employees I.e. provides
benefits for only highly compensated employees, these employees must include
medical reimbursements received in gross income. Highly compensated employees
include the five highest paid officers, greater than 10% shareholders and highest paid
25% of other employees.
Additionally, Life insurance premiums paid by Able Corporation on the
employees behalf are deductible for the employer but included in gross income by the
employee on any amount over the first $50,000 of the group term life insurance
coverage.

Parking:
Able Corporation owns a vacant building that can be converted to a parking
garage for its employees. If this is done, the company will be offering its employees

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

Taxation1@gmail.com

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section 132 fringe benefits. Employee financed parking up to $250 is excluded from
the employees gross income.

Discounts:
The allowance for employees to receive discounts on goods and services is also
a fridge benefit under section 132. Currently, your employer does not allow discounts
on the purchase of automobile parts. If this benefit is adopted, in the case of services,
the discount is limited to 20% of the price charged to regular customers. In the case of
property, the discount is limited to the company's gross profit percent but no discount
must be given to real property or investments. Additionally, the discount must be from
the same line of business in which the employer works.

Dependent care:
The president of your company expressed interest in a dependent care
assistance program. These programs are employer-financed programs that provide care
for an employee's children or other dependents. What this means for you is that you can
exclude up to $5,000 of assistance each year (2,500 for married a married employee
filing separate returns) on your income taxes. However, it is important to note that if
the program is adopted, the program cannot discriminate in favor of high income
employees and their dependents.

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

Taxation1@gmail.com

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It may be useful to evoke that the benefit program should be integrated with the
operation of determining annual salary adjustments. Differently, a significant program
may be prohibitive in terms of its cost to the society.

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

Taxation1@gmail.com

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4-62The employer completes W-2 forms on behalf on the employee. In general, if a


fringe benefit is nontaxable, employers do not withhold from the benefit, nor do they
report the benefit on the employees W-2 forms at year-end. The corporation is bound to
both reports the value of the vacations on the W-2s and withhold. The veil of secrecy
would, of course, have to be from the other compensation paid to the recipients. If the
benefits are taxable in the case of Jay Corporation, it is subject to withholding and is
reported on the employees W-2 form at year end. . Simulating the behavior is not
viewed as criminal, who could result in incarceration, the president will be held liable
for the 100% penalty under Sec. 6672. That is, the president would be personally liable
for a punishment equal to the taxes not withheld. In summation, the corporation could
be punished for filing an incorrect W-2, ($50 per incorrect W-2 under Sec. 6721),
providing the employee with an incorrect W-2 ($50 per incorrect W-2 under Sec.
6674), and failure to collect and remit taxes (100% of the amount, see Sec. 6672).

Taxation 1
Tel 242-356-9090
Fax 242-356-1010

Thompson Blvd,
Nassau Bahamas N
4912

Taxation1@gmail.com

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